Developing countries are especially hard-hit by the 99% losses that MLM companies routinely cause with their alluring but deceptive pyramid pay plans. However, these smaller countries are also heavily pressured by US government officials to allow MLMs to operate without regulation or law enforcement, much as they do in the USA.

Monday, 18 June 2012

You can fool some of the people all of time and all of the people some of the time, but you can't fool all of the people all of the time (with the notable exception of sociologists of religion, mainstream financial journalists and the many attorneys at the US federal Securities and Exchange Commission).

As proof of the validity of the above statement, in March 2012, Allen Stanford (b. 1950) was convicted in a Texas court of 13 criminal charges including fraud, conspiracy and obstruction of an SEC investigation. This week, he was sentenced to 110 years in prison.

The financial press now universally condemns Mr. Stanford as has having run a vast Ponzi scheme. Yet, until relatively recently, Mr. Stanford was widely-acclaimed by the very-same mainstream media as 'the 205th richest person in the USA with a personal fortune of approximately $2.2 billions.' Mysteriously, for many years, no journalist seems to have looked beyond the end of his/her nose and asked Mr. Stanford any searching-questions about the actual source of his apparently limitless wealth.

Mr. Stanford was universally described as 'the head of the Stanford Financial Group' which managed 'capital assets totalling $50 billions for clients in 140 countries.' In the adult world of quantifiable reality, more than 90% of these alleged 'assets,' now cannot be traced. However, it beggars belief that, until his arrest in 2009, no financial regulator ever bothered to look Allen Stanford in the eye, and ask him the one blindingly-obvious question which would have immediately unmasked him as yet another, absurd'economic' alchemist:

'What quantifiable evidence can you produce which would prove that your "Financial Group" has generated any significant revenue other than that deriving unlawfully from its own alleged "investors"?'

In 2009, it was reported that US federal law enforcement agencies had been monitoring Mr. Stanford's closed-market swindle for almost 10 years and that he had even been suspected of laundering drug money for Mexico's Gulf Cartel.

In 2010, it was reported that, whilst in custody awaiting trial, Mr. Stanford:

had been beaten up by another prisoner resulting in a broken nose and concussion.

had possibly suffered permanent brain, and spinal, damage

had become addicted to anti-anxiety drugs.

In January 2011, it was reported that a federal judge, David Hittner, had declared Mr. Stanford 'too incompetent ' to stand trial (at that time), but that Mr. Stanford had been refused permission to be released to a mental hospital for treatment, because there was a significant risk that his latest claims were part of an elaborate ploy to enable him to abscond.

Self-evidently, Mr. Stanford exhibits the diagnostic criteria of severe and inflexible Narcissistic Personality Disorder. Classically, he has steadfastly pretended moral and intellectual authority, and he has gone to the most extraordinary lengths to prevent, and/or divert, investigation of his clandestine criminal enterprise and isolate himself from liability. He even acquired a presidential-style helicopter and private jets. Indeed, Mr. Stanford still arrogantly refuses to accept that he has committed any crime and he has tried to blame his dramatic fall from grace on various other people, including associates and investigators.

Central to Mr. Stanford's strangely-familiar fraud was the 'Stanford International Bank,' based in Antigua. This labyrinth of legally-registered, but ultimately counterfeit, corporate structures raised at least $7 billions illegally by recruiting an army of salaried commission agents to peddle effectively-valueless pieces of paper arbitrarily defined as 'certificates of deposit.' In simple terms, Mr. Stanford's racket was a pyramid of deception. His agents unwittingly deceived victims with the false promise of a guaranteed annual interest-rate in excess of 10%. Exactly like Charles Ponzi and Bernie Madoff,Mr. Stanford's self-gratifying, and self-perpetuating, game of economic make-believe could only be sustained so long as he maintained an absolute monopoly of information and kept finding more and more ill-informed players. When searching questions began to be asked publicly by a few concerned persons within the world of finance, many of Mr. Stanford's victims demanded their initial 'investments' and imaginary profits. The authorities soon found themselves buried under an avalanche of complaints. Prior to these events, Mr. Stanford had sought to make the truth unthinkable (but actually attracted a lot of suspicion) by significantly increasing the stakes in his already-massive bluff.

Mr. Stanford lived in St Croix in the US Virgin Islands. He owned various luxury properties and a 112ft yacht, 'Sea Eagle' - all of which were seized along with his other illegally-acquired assets. Mr. Stanford is now an undischarged bankrupt with a net-worth of zero. Although American by birth, he also retains citizenship Antigua and Barbuda, where he once was the largest employer after the government. Amongst various local businesses, Mr. Stanford had owned two newspapers.

In 2008, Mr. Stanford used part of his ill-gotten gains to stage a $20millions (winner takes all) series of 5 cricket matches between England and his own team, the 'Stanford All Stars,' made up of West Indian players.

Mr. Stanford later apologised to the England team for being 'over-friendly' with some of their wives and girlfriends during one of the matches.

Mr. Stanford also bought association with the glamorous professional sports of golf, tennis, polo and sailing. He once signed deals with popular-golfer, Vijay Singh, and clean-cut, England footballer and businessman, Michael Owen. In this way, both these stars were deceived into endorsing a massive, ongoing fraud.

For obvious reasons, Mr. Stanford personally gave around $1 million to US politicians (but mostly to Democrats). Since 2000, the 'Stanford Financial Group' contributed $2.4millions via its so-called 'Political Action Committee' and employees. In total, more than 100 politicians are known to have received'contributions' (i.e. bribes) from the Stanford organized crime group, including Barack Obama and his 2008 presidential challenger, John McCain. Both these men have since said they would hand back the stolen funds or donate them to charity.

Self-appointed sovereign leadership. Pernicious cults are instigated and ruled by psychologically dominant individuals, and/or bodies of psychologically dominant individuals (often with impressive, made-up names, and/or ranks, and/or titles), who hold themselves accountable to no one. These individuals have severe and inflexible Narcissistic Personalities(i.e. they suffer from a chronic psychological disorder, especially when resulting in a grandiose sense of self-importance/ righteousness and the compulsion to take advantage of others and to control others’ views of, and behaviour towards, them).* They steadfastly pretend moral and intellectual authority whilst pursuing various, hidden, criminal objectives (fraudulent, and/or sexual, and/or violent, etc.). The admiration of their adherents only serves to confirm, and magnify, the leaders’ strong sense of self-entitlement and fantasies of unlimited success, power, brilliance, beauty, ideal love, etc.

* ‘Narcissistic Personality Disorder,’ is a psychological term first used in 1971 by Dr. Heinz Kohut (1913-1981). It was recognised as the name for a form of pathological narcissism in ‘The Diagnostic and Statistical Manual of Mental Disorders 1980.’ Narcissistic traits (where a person talks highly of himself/herself to eliminate feelings of worthlessness) are common in, and considered ‘normal’ to, human psychological development. When these traits become accentuated by a failure of the social environment and persist into adulthood, they can intensify to the level of a severe mental disorder. Severe and inflexible NPDis thought to effect less than 1% of the general adult population. It occurs more frequently in men than women. In simple terms, NPD is reality-denying, total self-worship born of its sufferers’ unconscious belief that they are flawed in a waythat makes them fundamentally unacceptable to others. In order to shield themselves from the intolerablerejection and isolation which they unconsciously believe would follow if others recognised theirdefective nature, NPD sufferers go to almost any lengths to control others’ view of, and behaviour towards, them. NPD sufferers often choose partners, and raise children, who exhibit ‘co-narcissism’ (a co-dependent personality disorder like co-alcoholism). Co-narcissists organize themselves around the needs of others (to whom they feel responsible), they accept blame easily, are eager to please, defer to others’ opinions and fear being seen as selfish if they act assertively. NPD was observed, and apparently well-understood, in ancient times. Self-evidently, the term, ‘narcissism,’ comes from the allegorical myth of Narcissus,the beautiful Greek youth who falls in love with his own reflection.

Currently, NPD has nine recognised diagnostic criteria (five of which are required for a diagnosis):

Thursday, 7 June 2012

For several months on this Blog, David Brear has been offering readers a plain-language explanation of pernicious, blame-the-victim cults in general, and of 'MLM Prosperity Gospel' cults in particular.

Robert FitzPatrick

In response to his receiving requests from financial analysts for a 'technical explanation' of exactly why'Multi-Level Marketing' is a giant scam, David Brear now offers readers an important article by his associate, Robert FitzPatrick (President of Pyramid Scheme Alert), analysing last month's collapse of the previously-inflated market-price of effectively-valueless 'Herbalife' and 'NuSkin' shares.

A highly unusual event occurred in May, 2012 that drastically affected businesses and individuals who invest in the stocks of 'multi-level marketing (MLM) companies.' A hedge fund manager – who is famous for rigorous research, uncanny insight into future trends and for selling ”short” the companies that he thinks are unsustainable – publicly asked a few pointed questions about the 'MLM' company, 'Herbalife.' The mere questioning appears to have triggered a panic sell-off of the stock. The result was a drop in share price of more than 20%. And even though he did not reference it, the stock of a similar 'MLM' company, 'Nu Skin,' also crashed. For individuals and institutions holding 'Herbalife' or 'Nu Skin' stock, this caused huge financial losses and threw many investors and analysts into confusion. Billions of so-called 'MLM equity' vanished. The stocks of both 'Nu Skin' and 'Herbalife' had been high flying, based on 'growth' and the companies’ implausible claims of extraordinary consumer demand for their commodity products – weight loss drinks and skin lotions.

The questions by the hedge fund manager notably ignored 'Herbalife’s' products completely. Instead, they probed the 'business model,' asking about the percentage of 'sales' by 'Herbalife’s distributors' to retail customers. In other words, where does 'Herbalife’s' money actually come from, consumers in the open market or internally from those under contract to 'Herbalife' and participating in its pay plan? He also asked about a disclosure in an earlier annual report of percentages of orders placed by segments of the 'Herbalife sales force,' which inexplicably was absent in the latest report.

Loaded Questions

While many investors appear flummoxed by those questions and the ensuing financial collapse, for those familiar with 'multi-level marketing (MLM),' the questions were loaded with meaning and the consequences understandable. For those in-the-know about 'MLMs' the only question might be, how could intelligent and professional people hold large positions in 'Herbalife' stock yet know so little about that 'business?' (At this moment, end of May, 2012, it is not known if the questioning hedge fund manager was among those that owned stock in 'MLM' companies).

In the case of 'Herbalife,' only a few years before a federal judge had ruled that a charge by a group of top-level'Herbalife distributors' that 'Herbalife' was an illegal pyramid scheme was worthy of a day in court, and the judge spelled out the specific reasons why he felt the charge had merit. More recently, a European court had ruled that'Herbalife' was an illegal pyramid scheme. 'Herbalife' had also paid out millions also to settle two separate class action lawsuits, both of which charged that the company was a pyramid scheme. The suits claimed that most'Herbalife' revenue came directly and ultimately from the investments of the 'salespeople,' not from retail sales.

Prosecutions of 'MLM' companies are normally based on whether the 'MLM businesses' are disguised pyramid schemes or not. A key determinant of that question is the level of revenue gained from retail sales. The answer can determine the 'MLM' company’s legality or fraudulence. 'MLM' companies in which the profit of earlier'distributors' is derived from the payments of later 'distributors' are viewed as 'closed market' scams, pyramid schemes. The courts have repeatedly affirmed that there must be adequate retail revenue (outside the sales chain) to cover the internal payments that the 'MLM' companies make to their recruiters. The most recent court affirmation came in a case brought by the Federal Trade Commission against the popular 'MLM, Burnlounge Inc.' The courts have made clear and the FTC itself has based its prosecutions on the rulings that payments to recruiters cannot come directly and ultimately from the new recruits themselves.

The retail revenue issue is not only a crucial legal distinction. It determines the viability of the business model and the marketing program. In those cases where the source of the payments to recruiters is the investments of the later sales recruits, the business model dictates that the only way a new sales recruit could recoup his/her own investment would be to recruit yet more salespeople, who would have to do the same, ad infinitum. This is mathematically and financially impossible. The system is unsustainable. The last ones to join are always financially doomed, i.e., the 'business practice' is unfair. The income claims and promises used to lure new recruits would be false and misleading, i.e., the 'business practice' is deceptive.

The hedge fund manager’s question about how much revenue comes from outside the sales chain – retail revenue – could therefore be interpreted as a stick of dynamite – a question as to whether 'Herbalife' was engaging in 'unfair and deceptive trade practices,' that is, whether it is a legal company or not. The followup question about data disclosures addressed the other factor 'MLMs' are consistently accused of – the concealment of massive failure/quitting/loss rates among the newest recruits. Effectively, he appeared to be probing whether 'Herbalife'might be churning thousands of consumers each year and causing large-scale consumer losses while concealing the data.

The sudden sell-off and the resulting investor losses is not a subject of speculation and analysis by the financial media. For the first time ever, business writers are asking about the sustainability and even legality of 'multi-level marketing.' It may be that a Wall Street tipping point was finally reached following SEC subpoenas to the 'MLM, Pre-Paid Legal' and multi-million dollar court judgements against that 'MLM.' It may have included the multi-million dollar settlement payments made by 'MLM' pillars, 'Herbalife, Amway' and 'Nu Skin,' in class action lawsuits in which consumers all made the same pyramid fraud charges. And it have been motivated by the strange volatility of 'MLM' stocks or preposterous 'MLM' product claims about 'anti-aging,' or 'MLM sales' of the now FDA-banned 'weight loss' substance, ephedrine. Whatever the spark, recent inquiries indicate that, possibly, Wall Street is waking up to the reality of this new American industry, called 'multi-level marketing,' and is asking if it might be a gigantic pyramid scheme selling false hopes to Main Street America and making millions off consumer losses.

This question has been raging on Main Street for many years. Wall Street was not paying attention to those claims. It was too busy making money on what 'MLM' called 'growth and profits.'

The 'MLM Industry'

Note: The analysis of this report broadly describes the traits of this still undefined (by Wall Street) 'industry' called'multi-level marketing.' To understand the workings of any individual 'MLM' company and the degree to which these general traits apply requires research and analysis.

Among publicly traded 'multi-level marketing' companies are 'Nu Skin (NUS)', 'Herbalife (HLF), Usana (USNA), Avon (AVP), Medifast (MED) ('Take Shape for Life Div.' that accounts for nearly 60% of 'business'), 'Mannatech (MTEX), Reliv (RELV)' and 'Your Travel Biz,' now called 'YTB International (YTBLA). Pre-Paid Legal Services, Inc. (PPD)' was, until last year, also publicly traded, when it was acquired by a private equity firm. 'Amway' also had two publicly traded subsidiaries in the past, 'Amway Japan' and 'Amway Asia Pacific.' These companies were also later privatized.

Virtually the entire stock value of the 'MLM, Your Travel Biz.com (YTBLA)' was wiped out several years ago after the company was prosecuted by the California Attorney General’s Office for operating an illegal pyramid scheme. To some degree, the fate of 'YTB' is the jeopardy all 'MLMs' face from regulators. 'YTB,' until that prosecution by one state, was high flying and fast growing. It had hundreds of thousands of sales people, celebrity spokesmen, and a stock price that reached $8.50 a share. It had no record of investigations or prosecutions. Currently it trades for $.02, (that’s two cents a share).

Historically, 'Avon' was a traditional direct selling company, basing its revenue upon brand equity, retail customer loyalty, consumer demand, and retail selling. However, in 2005, 'Avon' modified its model to 'multi-level marketing' and now tells shareholders that it 'offsets' declining revenue and declining sales per sales representative by recruiting more 'salespeople' (who buy inventory), a classic 'MLM' strategy. 'Avon' is also embroiled in a bribery controversy in China, where the 'MLM sales model' is banned.

The 'MLM' companies noted above have a collective market capitalization of about $15.5 billion. This is indeed 'big business,' but as a group of common equities, they have shown extraordinary instability. Just in the last year, all have dropped from high share prices to low by a range of 40-80%. Yet, despite its collective size and volatility, the 'MLM industry' is an information black hole for Wall Street. The sudden plunge in the stock values of 'MLMs, Herbalife' and 'Nu Skin,' that was set off by the simple questions of one major investment house could be the signal that a deeper look into this 'business' is coming.

Investor Ignorance, Fantasy and Cynicism

Publicly traded companies must disclose more information about their operations than private firms do. However,'MLM' companies, publicly traded or not, are not classified as a distinct business sector by the SEC or by financial analysts. Rather, they are mis-categorized by their respective products (skin lotion, weight loss drinks, laundry soap, vitamin pills, etc.). Consequently, the unique 'business model' and specialized 'marketing practices' of'multi-level marketing' are seldom examined or understood by investors or by Wall Street analysts. An entire'industry' is getting vast amounts of money from Wall Street investors who have little or no information about that'industry.' It is also likely that no one inside the U.S. Securities & Exchange Commission (SEC) has a clue how'MLM' works, and yet that agency is supposed to protect investors from potential industry deception.

Worse than merely not knowing, some financial analysts hold absurdly erroneous and unfounded beliefs about how 'MLM' companies operate. They have no knowledge at all about failure rates of 'distributors,' recruitment rates, churn rates, 'marketing' tactics, 'income' claims, reliance upon recruiting, market saturation factors, cult aspects,'training and motivation' seminars, or even how the 'MLM pay plans' – the keys to the entire 'business' – work. Many know nothing of 'MLM’s' legal jeopardy or the special regulatory risks they run. They know nothing about who'MLM' customers are because 'MLM' companies claim they don’t know either! Many analysts and investors maintain fantasies of encyclopedia salesmen, 'Avon Ladies' and 'Fuller Brush men,' mythic figures that disappeared decades ago and were replaced by aggressive hucksters of 'exponential expansion'of 'salespeople,' not door-to-door sales of consumer products.

Some financial analysts who have contacted Pyramid Scheme Alert for insights into 'MLM' have stated baldly that they privately view the 'MLM industry' as a giant scam, but a very profitable one. So they say they will dutifully invest their clients’ funds in 'MLMs' for as long as the government does not prosecute them and the pyramid does not collapse. They point out theties that 'MLM' companies have to FTC officials, the 'MLM industry lobbying' of Congress and state legislatures and the millions recently given to presidential candidate Mitt Romney by 'Nu Skin' executives. They express cynicism that anything will stop such a profitable and politically connected scam.

'Marketing and Business Model' Realities

'Multi-level marketing' companies constitute a distinct new 'business' sector on Wall Street and Main Street. Companies in this 'industry' have a common 'business model' and a common product. The true product of all 'multi-level marketing' companies is a financialproduct. It is an enticing 'income opportunity'.'MLM' is the only 'industry,'other than gambling and securities, that promises consumers they can make money – a lot of money – if they also buy their products. To gain this 'income opportunity,' the consumer must first buy the right to become a'contractor' for the 'MLM' and to operate a 'distributorship.' All consumers who sign up with 'MLM' companies, whether they are at the top or the bottom of the chain, are legally re-defined from consumers to 'contractors' and become authorized 'MLM distributors.'

The financial product sold by 'MLMs' is the the same for all the companies. The financial product is based upon the consumer/investors paying to join, buying products and then recruiting other investors ('salespeople'). The universal 'MLM compensation plan' provides for payments to be transferred from a long genealogy of 'salespeople'up to the top of the recruiting chain. As the chain extends and expands, the volume of income flowing to the top grows exponentially (2,4,8,16,32,64, etc.). The expansive income from a growing base of recruits is also compounded by the classic , top-loaded 'MLM pay formula' that actually pays those at the upper level of the chain more than those below who do the actual recruiting, per sale. This is exactly the reverse of conventional direct selling companies that pay the great majority of total commission on each sale to the bottom ranks where the work is actually done.

So the top positions in 'MLM' gain from more recruits in the chain and, as a group, they get more dollars per sale from all recruits in the chain below them. 40-60% of the price of the goods paid by the all the 'salespeople' collectively is transferred to the recruiting chain. The pay formula proscribes that 50-80% of that margin will be transferred directly to the top 1% of the recruitment chain. It does not take a business genius to see that the real 'income opportunity' is based on recruiting more 'salespeople'… to recruit more 'salespeople'… to recruit… not on individual door-to-door sales to retail customers.

The last person to join the chain is sold exactly the same income proposition as the first one was. Market limits and mathematical limits are not accounted for. The 'MLM' company proclaims that the income potential for all new consumers who join is always and forever 'unlimited.'

Marketing by the 'MLM' company does not consist of the promotions of its consumer product. Few engage in advertising. Instead, the recruitment of a new consumer-investors constitutes the true sale by the 'MLM' company. The only real competitors of 'MLM' companies are, therefore, other 'MLM' companies that are selling exactly the same 'income' scheme, regardless of their consumer product offering. All 'MLM' companies compete with each other in scouring the land for the same recruits. Revealing the common identity of the members of this 'industry,'most 'MLM' companies contain 'non-compete' clauses in their 'sales' contracts that prohibit all salespeople from participating in other 'MLMs' – regardless of product type – during their tenure. Consumers who sign up are also legally prohibited from recruiting others in the scheme to any other 'MLMs' (regardless of product) for as much as a year or more after quitting.

The sale of consumer products occurs subsequently to recruiting. The purchase of a 'MLM' consumer item by the'MLM' salespeople is inextricably tied to and is a by-product of their first buying the 'income opportunity.' A product purchase by the salesperson is required or is effectively induced in order for the new recruit to get in on the'income opportunity.' A closer look at these schemes shows that the product could not be sold at near the volume the companies achieve or at the high prices charged without the attachment of 'MLM’s unique' and defining 'income'promise.

'MLM' companies, unlike all conventional businesses, do not need to build brand equity, develop product loyalty, produce superior quality, offer better pricing, or provide convenient availability. In fact, most 'MLM' products are unknown to buyers prior to recruitment, are of commodity value, are higher priced than similar goods and are available only through the narrow and limited 'MLM' channel.

In many cases, the consumer pays money for a 'MLM' product of lesser value than is charged, and in the bargain, often buys consumer goods he/she would not have purchased at all or at that price or at that volume without the exciting promise of 'income' driving and shaping the transaction. When the 'income' promise is unfulfilled, as it will be to virtually all recruits, most consumers quit the scheme within a year and never buy the 'MLM' product again in their lives, thus dispelling any claims that 'love of product' was what led them to sign up in the first place.

In the recruitment-based 'MLM' scheme, the 'distributorship' that each new recruit buys as an 'independent contractor' is actually worthless. Few, if any, make a sustainable income from 'distributing' products to the general public. The value is realized only if enough other investor/'distributors' are brought into the pay scheme. It is those later investments that are transferred to the recruiters and are renamed 'income.' In reality, they are merely capital investments transferred from a later group to an earlier one.

'MLMs' Perpetually Haunted by Government Crackdown

When the 'MLM income' claims are revealed to be false or misleading, or when they are shown to be dependent upon endless chain recruiting, the 'MLM' may be subject to prosecution for operating a pyramid scheme. Prosecutions have devastating consequences for the company and its shareholders, as the experience of the'MLM, Your Travel Business,' revealed.

When brought by the US Federal Trade Commission (FTC), prosecutions are done under Section 5 of the FTC Act, against 'unfair and deceptive trade practices.' When states bring charges, they usually cite their own state statutes against pyramid schemes or deceptive sales.

'MLMs,' therefore, are unique in the 'business' world by their potential for being regulated out of existence. What is at stake is not exposure of financial abuse or excesses, but rather the legitimacy of the 'business model' itself. The regulatory threat is not directed at the 'MLM' products, pricing, advertising or financing, though all may be deceptive, but rather at the driver of the company’s revenue, the defining 'MLM pay plan.'

Selling an 'income' promise that is based on recruiting other investors who must do the same, etc., requires extensive deceit because such a plan cannot sustain itself. Since the schemes are constantly recruiting more than half their entire 'sales forces' each year, such a model causes financial losses to 99% of all the 'distributors.'All those who lose and quit must constantly be replaced. 'MLMs' are in a never-ending and existential hunt all over the globe for new recruits. Effectively, they collapse each year, as the majority of their purchasing sales representatives 'fail' and quit, and then the 'MLMs' resurrect themselves with the investment capital of fresh recruits.

Defense, Diversion and Disguise

To protect themselves from prosecution or exposure, 'MLM' companies put forth an elaborate fiction of 'direct selling' to disguise the core 'business' of pyramid recruiting. As defencive measures, a massive PR program and a world-class lobbying campaign are conducted by the 'MLM industry' to convince consumers that the pay/buy/recruit model is valid, and lucrative for all and to persuade regulators to look the other way. It’s all about the products, the companies claim. Yet, consumers routinely report attending recruitment meetings in which the'MLM' product is barely referenced or is said to 'sell itself.' The real 'business,' they say, was about recruiting more'salespeople.' The low profit margins on retail sales, the lack of marketing support and the high costs of finding and selling to retail customers make retail sales financially unfeasible. And how could retailing be profitable when the company continues to generate more and more retailers, all of whom are competitors for retail customers, in each geographic area?

Ten-Point Portrait of the 'MLM Industry'

To summarize the distinct factors that characterize and define 'multi-level marketing' companies:

1. Payment Required for Participating in 'infinitely expanding income opportunity.' The 'pay plan' offered to consumers is based upon the consumer enrolling as a 'salesperson' and recruiting and profiting from the purchases and other 'salespeople.' The 'income opportunity' requires payment of a fee or starter-kit purchase to qualify.

2. Ongoing purchase/sales requirements for qualifying or maintaining levels of commissions assigned to each level of the 'sales' chain.

3. Low level of profitable retail income per 'salesperson;' in some cases, virtually no retail revenue at all; and virtually no 'salespeople' making net profits from retailing alone; virtually all the income of the company comes only and ultimately from the 'salespeople' themselves.

4. Laden with Levels: The 'sales' organization has multiple levels unrelated to actual management or distribution needs. The multiple levels and ranks serve no sales or management purpose but are functionally required to leverage the pyramid recruitment program, 5,25,125,625, etc.

5. Top-Loaded Pay: The 'pay plan' by commission schedule and by policy, transfers a higher percentage of reward on each 'sale' to top levels of the chain than it does to the lower levels that are closest to the transaction and expended the most marketing effort and cost.

6. What the schemes sell in the open market is a 'business opportunity', not the advertised consumer products such as pills, potions and lotions. Products are not sold on the open market. Product 'sales' are mostly internal transactions between the company and its own contractors or between and among the contractors; product purchases follow the recruiting transactions; 'sales' volume depends directly upon recruitment levels. The essential and primary driver of 'sales' is the 'income' promise. Without it, the company would collapse immediately.

7. 'MLMs' do not compete with other companies selling similar consumer goods in the open market. Since their main customers are those inside a closed network, the 'MLM' company can charge far higher prices to its members based on intangible or promisedbenefits. The 'MLM' company has little need for 'customer service,'because it has few repeat customers and it has no need to advertise or develop brand identity since it is not marketing products openly.

8. 'MLM' companies are not affected by the laws of supply and demand – for their products. Their real product of an 'income opportunity' is 'limitless,' based on a claim of endless recruiting that can produce unlimited profits. When markets for their consumer products decline, as in an Economic Recession, the market for 'MLMs’true product, an 'extraordinary income opportunity,' rises along with unemployment, misery and desperation. Even if the weight loss or cosmetic markets, for example, retract, the 'MLM' sales of those types of products may expand.

9. Similarly, 'MLM' companies are not affected by market prices. Once inside the 'pay plan,' few consumers will do comparison pricing of the 'MLM' goods, because they are buying an 'income opportunity,' not just the product itself. Ordinary products, that cannot offer 'income' are not 'comparable.' Even if the 'MLM' offers a competitive price for their products, they can also add many buying costs such as sign-up fees, renewal fees, training assessments, conference registrations, and back-office charges. Most also charge high shipping fees and sales taxes based on a higher price than the 'sales' representative actually paid.

10. Magical Products: The 'MLM' products are famous for being promoted as 'unique, groundbreaking, patented and not available in stores.' They are often promoted as having nearly magical properties. They are said to be tickets to high income and can 'sell themselves.' Often they are claimed to cure every ailment from autism to AIDS, to halt the ageing process or to ward off cancer, though the fine print says that distributors can claim no therapeutic value at all.

'MLM' Pitfalls

Though the 'MLM' model was impervious to economic and market factors that all legitimate business adapted to,there are three specific factors that affected 'MLM businesses' negatively:

Regulatory action against fraudulent or false product claims, misleading income testimonials or illegal pyramid operation. Previously, law enforcement was a major threat to 'MLM' companies. But, in recent years, regulation has become neglected and corrupted. Some FTC officials in Washington have become lobbyists for'MLMs.' Others came to the FTC from working for 'MLM' companies. The record of the FTC shows that significant regulation virtually ceased in 2000. Some state regulators have privately reported to Pyramid Scheme Alert that some 'MLMs' are simply too large for them to prosecute in their states. The state regulators say they don’t have enough money or manpower, and they are inhibited by some state legislators that are financially on the take from'MLM' companies.

Exposure and Scrutiny by fraud analysts, whistle-blowers, consumer protection groups, investigative journalists, or class action lawsuits. These actions have had effect but they are not sustained well over time. Factual information and analyses are dwarfed by 'MLM' PR and dis-information.

Incompetence: Some 'MLM' schemes decline or fail due to failure to expand to new territories as market saturation sets in, financial or operational mismanagement, under-capitalization, computer flaws, or by major defections of their top recruiters to other 'MLM' schemes offering better rewards to recruiters. The failed 'MLMs' are substantively no different from the successful ones in 'business model' or in types of products or marketing tactics. Failure has nothing to do with product demand. Failure is internal and not driven by conventional market or economic forces because 'MLMs' do not participate in the open market for product sales.

Possible New Force

Today, a fourth factor has emerged that could drastically affect the fortunes of 'MLM' companies. It is the scrutiny of investors and business analysts. It appears that the securities industry is beginning to focus on this sector. To date, no investment fund has developed a comprehensive analysis or challenged 'MLM' companies to produce valid information about their actual operations. The securities industry, on behalf of shareholders, could begin – even if regulators will not – to demand that 'MLM' schemes fully disclose their actual operations, including:— Retail sales levels and actual average incomes of 'distributors' based on retailing (to show whether they are in the 'direct selling business' or not).— Churn rate of 'distributors' (who turn out to be the real customers”. This would reveal market potential and market saturation rates. It would also shed light on whether customer loyalty and demand for product were driving'sales,' or 'sales' were gained by 'channel stuffing,' which is normally viewed as fraudulent.— Defections of top recruiters. Since all revenue volume is based on recruitment levels, revelations of defections by top level recruiters reveals threats to future volume more so than any other market factor.— Historic data on 'distributors' in a given geographic area. If investors knew how many consumers were – or ever have been – signed up in a market area, they could determine true market potential and could measure the factor of market saturation, which the 'MLMs' currently conceal. Cumulative recruitment data would provide transparency on the company’s true product and actual mission – the sale of an endless chain income promise – and its actual financial consequences for the public.

If these facts were revealed, investor confidence might become quite difficult to sustain.